The Ninth Circuit, in Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., Case No. 12-17675 (9th Cir. Sept. 11, 2015), joined the Seventh Circuit in finding that an asset purchaser, if a successor, can be liable for withdrawal liability triggered as a result of the sale. Moreover, the Ninth Circuit went a step further by setting forth how it would determine whether the buyer was a successor.

Studer’s Floor Stops, Michael’s Starts

It started innocuously enough.  In November 2009, Studer’s Floor Covering, Inc. (“Studer’s Floor”) announced it would be shutting down the business at the end of the year.  As Studer’s Floor wound down, one of the company’s longtime salesmen, Michael Haasl, incorporated his own company, calling it Michael’s Floor Covering, Inc. (“Michael’s”) and began bidding on his own projects.  Haasl negotiated with Studer’s Floor’s landlord so as to take out a lease on the Studer Floor’s storefront and warehouse the day after it ceased operations.  Haasl even obtained, with Studer Floor’s help, Studer Floor’s business phone number and hired five of Studer’s Floor’s former employees.  Haasl, however, did not technically buy Studer’s Floor.  The majority of Studer’s Floor’s equipment was sold off at auction and Haasl did not obtain or use Studer’s Floor’s business name or contact/customer lists — although Haasl knew many of its customers and suppliers given his years as a salesman.

Studer’s Floor and the Multiemployer Pension Plan Amendments Act

At the time of its closing, Studer’s Floor was a party to a CBA and made contributions to a multiemployer pension plan covered by the Multiemployer Pension Plan Amendments Act (MPPAA) amendments to ERISA.  Studer’s Floor stopped making contributions to the fund after it ceased operations.  Michael’s never made any contributions to the fund because it was not a party to the CBA.

Under the MPPAA, if an employer withdraws from a multiemployer pension plan, it is liable to the plan for withdrawal liability. There is an exception to this general rule, however, for construction companies that close and do not resume operations within the jurisdiction of the CBA for at least five years.  The reason for the exception is that if a company permanently closes, then there is presumably no harm to the fund because that company’s customers will patronize other companies that contribute to the fund, thus keeping contributions to the fund steady.  The dispute in this case — brought by the Resilient Floor Covering Pension Trust Fund — concerned whether (1) a successor employer can be subject to MPPAA withdrawal liability; and (2) if so, whether and how successorship liability might apply to employers for whom the construction industry exception might apply; and (3) whether Michael’s was a successor.

The Fund Sues Michael’s

A Federal District Court in the Western District of Washington held that Michael’s was not liable for withdrawal from the pension plan under the common-law doctrine of successorship liability. The common law test asks whether, under the totality of the circumstances, there was substantial continuity between the old enterprise and the new enterprise.

On appeal, the Ninth Circuit Court of Appeals reversed. The Ninth Circuit, in agreement with the Seventh Circuit (recent ruling reported here), held for the first time that a successor employer can be subject to MPPAA withdrawal liability. The Court rejected arguments that applying successorship principles was somehow contrary to the MPPAA given its provisions for: (i) a sale of assets exception to liability; (ii) the ability of a fund to ignore transactions with a principal purpose to evade or avoid liability; and (iii) the construction industry exception itself. As to the latter, the Court found that just as a fund is harmed when a construction industry employer which ceased operations resumes operations without participating in the fund, it is harmed when a successor operates without participating in the fund. Thus, the Court considered the successorship doctrine to be fully consistent with the construction industry exception.

The Court then examined how established successorship factors are to be weighed in the context of withdrawal liability involving a construction industry employer. For purposes of determining whether there was “substantial continuity” between the successor and predecessor employers, which the Court considered to be the primary and “most important” successorship consideration, the Court found that it should give special significance to whether the successor has “the same body of customers.” In particular, where objective factors indicate that the new employer made a conscious decision to take over the predecessor’s customer base, the equitable origins of the successor liability doctrine support the conclusions that the successor must pay withdrawal liability.

The Ninth Circuit found that the District Court did not properly identify or weigh the successorship factors as applicable to the MPPAA context. First, the District Court did not give prime consideration to whether the Michael’s had the same body of customers (so-called market share capture). In that regard the Circuit Court agreed with the fund’s position that the spotlight should be on the relative amount of revenue generation by Studer’s former customers, versus Michael’s suggested simple headcount comparison. Second, while the factor was not of special relevance in this situation, the District court erred in its method of analyzing workforce continuity. The District Court assessed whether Michael’s employed a majority of Studer’s Floor’s former workforce.  The question should have been whether “a majority of the new workforce once worked for the old employer” and that only those “employees as to whom pension fund contributions would be due, should be included in the workforce continuity test,” not based on a majority of all the new company’s employees.  Last but not least, the District Court errantly considered whether there was a continuity of ownership between the old and new companies, something that is not a consideration in a traditional successorship analysis.

Had the District Court asked these questions, the Ninth Circuit opined, it may have found the requisite successorship factors to also find successorship liability under the MPPAA.  As such, the case was remanded.

Upshot For Companies

Two circuits now agree that asset purchasers can be liable for withdrawal liability as successors. No circuit court has taken the opposite position. And the Ninth Circuit has set forth how it would focus on where a new company’s customer base is derived for purposes of determining successorship. In light of this, employers need to assume that if they are a successor they will be subject to the predecessor employer’s withdrawal liability.