Seyfarth Synopsis: A Maryland federal district court recently found that a successor employer could be liable in an EEOC lawsuit for its predecessor’s alleged employment discrimination. For employers, this decision is a cautionary tale — the lesson being that liability for claims of employment discrimination can extend beyond the entity alleged to have been responsible for the conduct to reach a successor entity that played no role in the alleged bad acts. In light of this decision, due diligence in corporate acquisitions is more important than ever. An entity acquiring not only assets but also employees must understand the risks of liability regarding the workforce it is inheriting. As the Court decided here, no matter how explicit the disclaimer of liability, a successor may still be liable in an EEOC lawsuit for the discriminatory acts of its predecessor.

In EEOC v. Phase 2 Invs. Inc., Case No. 17-CV-2463, 2018 U.S. Dist. LEXIS 65719 (D. Md. April 17, 2018), a Maryland district court denied motions to dismiss and for summary judgment brought by a successor employer and the predecessor employer, finding that the Court not only had jurisdiction over the claims against the successor employer, but also that the successor employer could be held liable for the discrimination allegations levied against its predecessor. What’s more, the Court found that although the charging parties were undocumented workers, such status did not prevent the EEOC from pursuing Title VII claims on their behalf, contrary to the argument advanced by the predecessor employer. However, the Court recognized the precarious nature of the relief it could grant under such circumstances, as back pay and injunctive relief (i.e., re-hiring) are unavailable. Nevertheless, the Court stated that the Defendants would not get off “scot-free” if the allegations were proven true.

Case Background

In EEOC v. Phase 2, Invs., Inc., the employee charging parties worked for Maritime Autowash, Inc. (“Maritime,” and later became Phase 2 Investments). Maritime operated a car wash in Edgewater, Maryland. The charging parties alleged that they and other Hispanic employees were subject to harassment and discrimination while working for Maritime, and that they were fired after they complained to management about the alleged mistreatment. Notably, several months prior to their termination, an audit by U.S. Immigration and Customs Enforcement revealed that thirty-nine Maritime employees, including the charging parties, were not authorized to work in the United States. According to the charging parties, Maritime management gave each of these employees money “so that they could obtain new papers and be re-hired . . . under new names.” Upon their termination, in July 2013, the charging parties contacted the EEOC and eventually signed formal charges of discrimination against Maritime in February 2014.

In January 2015, after many months of negotiation, Maritime sold its assets including the Edgewater car wash to CWP West Corp. t/a Mister Car Wash (“Mister”). According to Mister, the deal was structured as an asset purchase agreement, in order to avoid assuming Maritime’s existing liabilities other than those expressly stated in the agreement — which did not include employment discrimination liability. However, as part of the purchase, Maritime did disclose to Mister its responses to the charges of discrimination filed by the charging parties with the EEOC.

In August 2017, after more than three years of investigation, litigation regarding EEOC subpoenas, and failed conciliation (including Mister), the EEOC filed suit against Maritime and Mister. In its lawsuit, the EEOC alleged, pursuant to Title VII, race discrimination in the form of harassment, intimidation, unequal terms and conditions of employment, lower wages, denial of promotional opportunities, disparate discipline and discharge because of their race and in retaliation for engaging in protected activity. Moreover, although the charging parties never worked for Mister, the EEOC alleged that Mister could be liable as a successor in interest.

On this record, Maritime and Mister moved for dismissal and summary judgment. After considering Maritime and Mister’s arguments, the Court issued a thorough opinion rejecting them in total.

Jurisdiction

Mister first challenged the Court’s jurisdiction over it as a successor entity. Although neither the charging parties nor the EEOC brought administrative charges against Mister — which is a jurisdictional requirement under Title VII — the Court found that it had jurisdiction over the claims. Id. at *21. To reach this conclusion, the Court drew a distinction between successor jurisdiction, and the more substantive inquiry regarding successor liability. Id. at *26. The former, it found, could be satisfied as long as the jurisdictional requirements were satisfied for the predecessor company, and the successor had notice of the charge and an opportunity to voluntarily comply. Id. at *26. Specifically, “[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.” Id. at *26 (emphasis in original).

Because Mister had notice of the charges prior to filing of the lawsuit, and even had the opportunity to conciliate with the EEOC, the Court found that Mister need not actually be named in a charge. Id. at *27. The Court rejected a formalistic approach that would require the refiling of the exact same charges against Mister. Id.

Successor Liability And The Applicability Of Title VII To Undocumented Workers

Satisfied that it had jurisdiction over the claims, the Court moved on to address Mister and Maritime’s substantive arguments. Maritime argued that because it never employed the charging parties, it should not be treated as successor for liability purposes under Title VII. Further, Maritime argued that the charging parties’ status as undocumented workers required the lawsuit to be dismissed.

The Court held that as Maritime’s successor, Mister could be found liable under Title VII, despite the charging parties having never worked for Mister. The Court stated that successor liability under Title VII was equitable in nature, and that the Court should thus “balance the needs of discriminatees and the national policy against discrimination . . . against the unfairness of holding an innocent purchaser liable for another’s misdeed . . .” Id. at *39. Specifically, the Court looked to three primary factors: “whether a successor had notice, whether a predecessor had the ability to provide relief, and the continuity of the business.” Id. at *40-41.

As to notice, the Court distinguished successor liability notice from successor jurisdiction, stating that for liability purposes, Mister needed to have actual or constructive notice of the charges prior to purchasing Maritime’s assets. Id. at *41. While Mister’s knowledge as to the full extent of the charges was unclear, the Court found that Mister had at least constructive knowledge that Maritime faced some potential employment discrimination liability prior to purchase. Id. at *41-42. Indeed, the Court found it persuasive that Mister was a relatively sophisticated consumer that could have acted upon the red flags it uncovered during its due diligence. Id. at *42. Moreover, the Court noted that in the event the EEOC prevails and Mister suffers economic liability as a result, then Mister may look to the asset purchase agreement for recourse against Maritime, but that potential recourse against Maritime did not absolve Mister from liability “vis a vis the EEOC.” Id. at *42-43.

The Court next found that as the former employer, Maritime would not be able to provide relief, because the EEOC sought injunctive relief that Maritime could no longer provide at this juncture. Id. at *44. As to the continuity factor, the Court held that because Mister continued to run essentially the same business, a car wash, this factor also weighed in favor of finding that Mister may be liable as a successor. Id. at *45. Accordingly, under these three factors, the Court determined that it would be equitable to hold Mister jointly and severally liability for any liability that Maritime incurred. Id. at *46.

Finally, the Court addressed the thorny issue of whether discrimination against an undocumented worker was an unlawful employment action under Title VII. Id. at *54. After analyzing Title VII itself, along with Supreme Court and Fourth Circuit precedent, the Court found that “discrimination against an employee on the basis of his race, national origin, or participation in EEOC investigations is an unlawful employment practice under Title VII even if that employee is an undocumented alien, and the EEOC may therefore pursue its claim here.” Id. at *65. Among other things, the Court noted that finding otherwise would essentially give Maritime and other employers the ability to both hire undocumented workers and then unlawfully discriminate against those it unlawfully hired. Id. at *64. It further reasoned that “[e]ven 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 successors) 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.” Id.

Nevertheless, the Court noted that as a result of the charging parties’ undocumented status, the nature of relief that could be sought was limited. For instance, the Court found that it could not require Mister to re-hire the charging parties or award back pay. Id. at *66. Instead, the Court found that if the EEOC proves that Maritime discriminated against the charging parties, Title VII grants the Court broad discretion in fashioning relief and that the public interest would be best served through some monetary penalty. Id.

Implications For Employers

This opinion should be required reading for any employer contemplating an acquisition of another company. Indeed, the Court provided a detailed road map for when employment discrimination claims may be maintained against successor employers, even if such employees never worked for the successor and never named it in the charging documents. Based on this decision, merely disclaiming the liability of a predecessor entity through an asset purchase agreement is not enough to shield a successor employer from the EEOC’s pursuit of employment discrimination liability — although such disclaimers are still useful for recouping any monetary loss against the predecessor entity. Accordingly, through due diligence, employers must be sure to seek information regarding this potential employment liability, and understand the risks acquiring a company that has received charges of discrimination against it before deciding to proceed. Willful ignorance is unlikely to be a fruitful defense to such claims.