Purchasing company is found to be subject to successor liability for federal employment-related claims, even where it explicitly disclaimed such liability in the transfer of assets.
On March 26, Judge Richard A. Posner of the U.S. Court of Appeals for the Seventh Circuit issued his opinion in Teed v. Thomas & Betts Power Solutions, LLC, holding that the U.S. District Court for the Western District of Wisconsin properly applied the principle of successor liability for claims arising under the Fair Labor Standards Act (FLSA) against a company that purchased another company at an auction. This ruling was based upon the predicate finding that a federal common law standard for determining successor liability—and not state law—controlled where the liability was based on a violation of a federal statute relating to labor relations or employment. The decision is noteworthy for acquiring companies, as it stands in opposition to many state-law theories of successorship, upon which acquirors typically rely when analyzing the risks and benefits of an asset purchase.
In 2006, all of JT Packard & Associates' (Packard's) stock was acquired by S.R. Bray Corporation (Bray). Packard retained its name and corporate identity and continued operating as a stand-alone subsidiary of Bray. In 2008, Packard's employees filed a lawsuit alleging FLSA violations. Several months later, Bray defaulted on a bank loan that Packard had guaranteed. In repayment of its debt to the bank, Bray assigned its assets, including its stock in Packard, to an affiliate of the bank. The assets were placed in a receivership under Wisconsin law and auctioned off, with the bank receiving the proceeds. Thomas & Betts Power Solutions, the highest bidder at the auction, purchased the Packard business through what appeared to be an asset purchase, rather than a purchase of the Packard stock that was transferred to the bank in the settlement of Bray's debt. Thomas & Betts and the bank specified in the definitive agreement for the transfer of assets that the transfer would be "free and clear of all [l]iabilities" and that Thomas & Betts would not assume any liabilities that Packard might incur in its FLSA litigation. After the transfer, Thomas & Betts continued to operate Packard and offered employment to most of Packard's employees.
Through a substitution of defendants by the district court, Thomas & Betts became the entity against which the plaintiffs in the FLSA litigation sought damages for Packard's alleged violations during the time Packard was owned by Bray. The district court rejected Thomas & Betts's objections to the substitution. Thomas & Betts then made an offer of judgment, which the plaintiffs accepted, and the company appealed the judgment on the grounds of improper substitution.
Application of Federal Common Law Standard for Successor Liability
The Seventh Circuit explained that when a company is sold in an asset sale, as opposed to a stock sale, the purchasing company acquires the selling company's assets but not necessarily its liabilities. Whether the purchasing company acquires the selling company's liabilities depends on the application of successor liability. Most states, including Wisconsin, limit the application of successor liability to sales in which the purchasing company (the successor) expressly or implicitly assumes the seller's liabilities. Here, however, the Seventh Circuit held that, when liability is based on a violation of a federal statute relating to labor relations or employment, such as the FLSA, a federal common law standard of successor liability—which is more likely to favor plaintiffs and find liability—is the correct standard to apply. In reaching this conclusion, the Seventh Circuit followed the U.S. Supreme Court's reasoning in John Wiley & Sons, Inc. v. Livingston, holding that it is necessary to liberalize general common law successorship principles in cases brought under the Labor Management Relations Act and the National Labor Relations Act (NLRA) to achieve the objectives of those laws. The court engaged in a policy discussion of whether the reasoning in Wiley should extend to the FLSA, compared the FLSA to the NLRA and Title VII, and concluded that "there is an interest in legal predictability that is served by applying the same standard of successor liability . . . to all federal statutes that protect employees."
Based on the facts presented, the Seventh Circuit then considered the following factors in determining whether to apply successor liability:
- Whether the successor (Thomas & Betts) had notice of the pending lawsuit
- Whether the predecessor (Packard or its parent company, Bray) would have been able to provide the relief sought in the lawsuit before the sale
- Whether the predecessor could have provided relief after the sale
- Whether the successor can provide the relief sought in the lawsuit
- Whether there is continuity between the operations and workforce of the predecessor and the successor
Imposition of Successor Liability
The Seventh Circuit found that, unless there are good reasons to withhold successor liability, it is appropriate to enforce successor liability in suits involving federal labor or employment laws, even where the successor explicitly disclaimed liability when it acquired the selling company's assets. Absent successor liability, a violator of the FLSA could escape liability by selling its assets at a higher price without having the purchasing company assume liabilities.
Thomas & Betts argued that to allow the plaintiffs to obtain relief for their FLSA claims would give them a windfall because the plaintiffs had no right to expect that Packard would be sold rather than broken up and its assets sold piecemeal. The latter would have resulted in successor liability being precluded because of the lack of continuity between predecessor (Packard) and successor (Thomas & Betts). The court, however, concluded that to allow Thomas & Betts to acquire Packard without its associated liabilities would be a windfall for Thomas & Betts, "thus stiffing workers who have valid claims under the [FLSA]."
Implications for Companies
Under several state laws, a number of distinct but related successorship theories have evolved to prevent an unfair result for claimants. In structuring mergers and acquisitions transactions, businesses and lawyers typically analyze the risk of an "excluded" liability being imposed on the purchaser in opposition to the contractual intent of the parties within the framework of these state laws. The Seventh Circuit's decision in Teed stands as a reminder that a further level of analysis is in order when the liability to be left behind by the purchaser arises under a federal statute relating to labor relations or employment, including (as a highlighted in this decision) the FLSA. The federal common law standards for successor liability in such circumstances bear similarities to certain state theories, but acquirors and their advisors should take care to consider all of the factors under both state and federal theories of successorship when assessing potential asset purchases where employment liabilities are present.