Generally, buyers of corporate assets intend to acquire the assets but not the liabilities of the seller. Whether or not a purchaser acquires such liabilities is an issue of successor liability. Most states limit successor liability to situations in which the seller expressly or implicitly agrees to assume responsibility for such liabilities. Thus, it is not uncommon to see asset purchase agreements that purport to disclaim any liability for the debts or liabilities of the seller. However, such disclaimers do not control when the liability arises under federal labor and employment laws.
The United States Court of Appeals for the Seventh Circuit recently addressed this issue in Teed v. Thomas & Betts Power Solutions, Case Nos. 12-2440, 12-3029, 2013 WL 1197861, clarifying the standard for successor liability under federal law. In Teed, the Court found that a purchaser of corporate assets was liable for the seller’s liabilities under the Fair Labor Standards Act (“FLSA”) for overtime pay violations even though the purchaser acquired the assets on the condition that such acquisition was “free and clear” of all liabilities. Although such disclaimer of successor liability would normally allow the purchaser to be off the hook for liabilities under state law, the Court in Teed held that such disclaimers do not control in situations where liability under federal employment and labor statutes like the FLSA is at issue.
Instead, the determination of whether a purchaser is liable for a seller’s violations of federal law, including wage/hour claims under the FLSA, depends on a consideration of the following factors:
- Whether the purchaser had notice of the pending lawsuit/liability (If the purchaser has notice, this factor weighs in favor of successor liability on the theory that the purchase price was reduced to account for such liability);
- Whether the seller would have been able to provide the relief sought in the lawsuit before the sale (If the answer is no, then this factor tends to weighs against successor liability on the grounds that recovery would be a “windfall” to plaintiffs);
- Whether the seller could have provided relief after the sale (A seller’s inability to provide relief weighs in favor of successor liability because, without it, the plaintiff’s claim would be worthless);
- Whether the successor can provide the relief sought; and
- Whether there is continuity between the operations and the work force of the seller and the purchaser (If yes, then this factor weighs in favor of successor liability on the theory that nothing has really changed)
In Teed, the Court clarified that the default rule in most cases is to hold a purchaser liable in suits to enforce federal labor or employment laws, even when the purchaser disclaimed liability when it acquired the assets. In so holding, the Court explained that the imposition of successor liability is often necessary to achieve the statutory goals of federal labor and employment statutes because workers are generally unable to stop a corporate sale by their employer aimed at extinguishing the employer’s liability to them. In turn, a purchaser of corporate assets can be “compensated” for bearing the liability for such claims by reducing the purchase price for the assets it acquires.
Thus, it is clear that purchasers of corporate assets should consider the factors for successor liability on federal claims when vetting an asset purchase even though they intend to include a disclaimer of liability in the asset purchase agreement. If there is any doubt about potential exposure, such liabilities should be considered when evaluating the purchase price.