Why it matters

A federal court sided with the Equal Employment Opportunity Commission (EEOC) on the question of successor liability with respect to an employer who may now be responsible for alleged actions by its predecessor in a Title VII action. The agency’s complaint asserted that Mister Car Wash—through a previous corporation, Maritime Autowash—subjected Hispanic employees to a hostile work environment. The successor began the purchase negotiations during the EEOC investigation, although the extent of its knowledge of the actual facts remains in dispute. Mister moved to dismiss the EEOC lawsuit, but a Maryland federal court denied the motion. Finding both standing by the agency to bring the suit and jurisdiction over the defendant, the court held that Mister had actual and constructive notice of the EEOC’s charges before purchasing Maritime. While the successor made a concerted effort to contract away any liability for its predecessor’s actions, that contract did not include the EEOC, the court said, leaving open the possibility that Mister will be on the hook for Maritime’s actions. The decision provides a cautionary tale for employers about the dangers of successor liability.

Detailed discussion

The dispute began in 2013, when agents from U.S. Immigration and Customs Enforcement (ICE) conducted an audit of Maritime Autowash, which owned two car washes in Maryland. ICE informed Maritime that 39 of its employees were not authorized to work in the country and that, unless they could provide valid identification and employment eligibility documentation, Maritime would face civil—and perhaps criminal—penalties.

According to nine of the former workers, Maritime’s general manager held a meeting and provided each of those employees who lacked proper documentation with $150 to obtain new papers and be rehired under new names. A few months later, the nine workers submitted intake questionnaires to the Equal Employment Opportunity Commission (EEOC). The employees alleged that they were subjected to harassment and discrimination while working at Maritime, required to work longer hours with shorter breaks than their non-Hispanic counterparts, denied proper equipment for their jobs, and paid less than their non-Hispanic counterparts. The EEOC initiated an investigation.

The agency served Maritime with a subpoena and, when the company did not respond, the EEOC went to court to enforce it. Maritime argued that because the charging parties were not legally authorized to work in the United States, they could not seek relief under Title VII and, therefore, the EEOC could not enforce its subpoena. The district court agreed, but the U.S. Court of Appeals for the Fourth Circuit reversed.

While the EEOC’s investigation was occurring, Mister Car Wash began the process of purchasing Maritime’s assets. After signing a letter of intent with a purchase price of $15 million, the parties engaged in due diligence. Mister made every effort to protect itself from potential liability arising from Maritime’s actions, listing all assumed liabilities in a schedule attached to the asset purchase agreement (APA).

The schedule made no mention of any employment discrimination liability matters, although Maritime forwarded the EEOC-related position statements prepared by its counsel in response to the charging parties’ statements and sent a letter stating that it had an insurance policy with $1 million in coverage, adding that it would be a surprise if the charging parties’ damages exceeded that amount.

In January 2015, the parties closed the deal, and Mister took ownership of Maritime’s assets. Maritime subsequently formed a new corporate entity, Phase 2 Investments.

The EEOC then concluded its investigation and sent both Phase 2 and Mister a Letter of Determination stating that Maritime had violated Title VII, inviting the parties to conciliate. When that attempt failed, the EEOC filed suit against both defendants, alleging that Hispanic employees at Maritime were “relegated” to lower-paid positions, denied overtime and their fair share of tips, and subjected to verbal harassment.

Both defendants filed motions for summary judgment. U.S. District Court Judge James K. Bredar began with Mister’s preliminary challenges addressing whether the EEOC had proper standing to bring the suit against them and jurisdiction over them in this situation.

Although Mister argued that it never employed the charging parties, and no traceable connection existed between their alleged injuries and it as the successor, the court was not persuaded. The EEOC brought the case, not the charging parties, the court stated.

“And the EEOC has standing to bring it. The EEOC is bringing this case under the statutory authority granted to it by Title VII, to vindicate the public’s interest,” the court wrote. “The EEOC has named Mister as a Defendant under the theory that it is a successor to Maritime for purposes of liability under Title VII, and thus the injury—Maritime’s alleged violation of Title VII—is fairly traceable to Mister.”

Jurisdiction was similarly not a problem, the court found, because Mister was named as a successor to Maritime and sufficient jurisdictional facts existed to satisfy Title VII. “A federal court has jurisdiction over a Title VII claim against a defendant-employer who was not named in an administrative charge of discrimination when the theory of liability rests on the actions of a different employer who was named in the charge of discrimination, and the defendant-employer had notice of the charge and an opportunity to voluntarily comply prior to the plaintiff bringing the claim in court,” Judge Bredar wrote.

Mister was given “ample notice” of the charges of discrimination underlying the EEOC lawsuit and was provided with an opportunity to conciliate, the court held. Requiring the charging parties or the agency to file an additional, identical charge against Mister “would be simply a useless exercise in technical nicety.”

Turning to the substantive issue of successor liability, Judge Bredar performed a balancing act between the needs of discriminatees and the national policy against discrimination evinced by Title VII on the one hand, and the unfairness of holding an innocent purchaser liable for another’s misdeed and the possible chilling effect on the corporate marketplace on the other hand.

Beginning with notice, the court found that Mister had some notice of the EEOC charges prior to purchasing Maritime’s assets. While the extent of the notice was unclear, Mister “knew that Maritime was facing potential employment discrimination liability,” the court noted. “At the very least, Maritime had constructive notice.”

Further, as “a fairly sophisticated consumer” in the purchase, Mister “could have acted upon the red flags thrown up by Maritime’s counsel,” the court noted. Although the defendant emphasized the lengths it went to protect itself from incurring liability, this argument worked against it.

“Unfortunately for Mister, its evidence and argument demonstrating due diligence, careful contracting and ironclad indemnification does not move the Court in the direction it had hoped,” the court wrote. “First, the APA is an agreement between Mister and Maritime. … Second, the lengths to which Mister went to protect itself from liability, such as structuring the sale as an asset purchase, inquiring into Maritime’s liabilities, listing the assumed liabilities in a schedule and including an indemnification clause, actually demonstrate the fairness of holding Mister liable as a successor. … Mister had the opportunity to protect itself, and, it seems, did so.”

Should the EEOC prevail, Mister may be able to look to the APA to seek recourse against Maritime, the court added, but that did not help Mister vis--vis the EEOC.

Other factors—that Mister had the ability to provide relief while Phase 2 did not and that Mister continued in the car wash business—also tipped in favor of finding successor liability.

“The Court finds that Mister had some actual notice as well as constructive notice of the pendency of the EEOC’s charges against Maritime when Mister purchased Maritime’s assets, that neither Maritime nor Phase 2 is capable of providing all the relief that the EEOC has requested and that Mister is running largely the same business as Maritime,” the court observed. “For these reasons, the Court finds it equitable to hold Mister jointly and severally liable for any liability that Maritime, i.e. Phase 2, may incur in this case.”

Finally, the court answered the question of whether discrimination against an undocumented alien is an unlawful employment practice under Title VII, answering in the affirmative.

“[T]here is nothing in the text of Title VII that precludes application to discrimination against undocumented aliens, and enforcement of the statute in that context does not necessarily undermine the Congressional policy evinced in [the Immigration Reform and Control Act],” Judge Bredar wrote.

“Taking the EEOC’s allegations as true but applying Phase 2’s legal theory, Maritime received a sizable benefit by hiring the Charging Parties—it was able to pay them less, make them work longer hours and make them perform additional duties, all without violating Title VII. Even if Maritime was unaware of the Charging Parties’ immigration status when it hired them, if the Court were to ‘sanction the formation of [that] statutorily declared illegal relationship’ by shielding Maritime (and its successor) from Title VII scrutiny, other employers may well find an incentive to look the other way when potential employees are unable to provide proper documentation.”

However, the immigration status of the charging parties may “cabin the nature of the relief that the EEOC may seek in this case,” the court noted, as the agency cannot seek to have Mister rehire the charging parties or pay them back pay.

To read the memorandum in EEOC v. Phase 2 Investments, Inc., click here.