Successor Liability Applies in FLSA Actions, Even if Asset Purchaser Disclaims the Acquired Company's Liabilities: Seventh Circuit

Practical Law Legal Update 7-525-4856 (Approx. 6 pages)

Successor Liability Applies in FLSA Actions, Even if Asset Purchaser Disclaims the Acquired Company's Liabilities: Seventh Circuit

by PLC Labor & Employment

Key Litigated Issues

The key litigated issues in Brian Teed v. Thomas & Betts Power Solutions were:

Whether the Federal common law doctrine of successor liability would apply to FLSA liability.
If successor liability applies to FLSA liability, whether it operated to transfer liability to a company that disclaimed that it was assuming the acquired company's liabilities when it purchased the assets of an ongoing business in receivership.

Background

In two closely related collective actions for overtime pay under the FLSA, the original named defendants were:

JT Packard & Associates (Packard), the plaintiffs' employer.
Packard's parent, S.R. Bray Corp.

The suits and appeals were considered jointly (FLSA suit).

Packard, under its new ownership by Thomas & Betts, provided maintenance and emergency technical services for equipment designed to protect computers and other electrical devices from being damaged by power outages. In 2006, Bray acquired all of Packard's stock, although Packard:

Retained its name and corporate identity.
Continued operating as a stand-alone entity.

The plaintiffs filed the FLSA suit two years later while Packard was owned by Bray. Several months after the plaintiffs filed the FLSA suit, Bray defaulted on a secured loan that Packard, Bray's subsidiary, had guaranteed. To repay as much of the debt as possible, Bray assigned its assets, including its stock in Packard (which was its principal asset), to an affiliate of the creditor bank. Next, the assets were:

Placed in a receivership under Wisconsin law.
Auctioned off, with proceeds going to the bank.

Thomas & Betts was the highest bidder at the auction, paying approximately $22 million for Packard's assets. In the transfer of the assets to Thomas & Betts, the following conditions were specified:

The transfer must be "free and clear of all Liabilities" that the buyer had not assumed.
Thomas & Betts would not assume any of the liabilities that Packard might incur in the FLSA suit.

After the transfer, Thomas & Betts:

Continued to operate Packard:
- in the same way that Bray had done; and
- under the same name.
Offered employment to most of Packard's employees.

The district judge allowed the plaintiffs to substitute Thomas & Betts for the original defendants, because Thomas & Betts had bought Packard's assets and placed them in a wholly owned subsidiary. The plaintiffs then sought damages from Thomas & Betts in their collective action for FLSA overtime pay, even though the alleged FLSA violations occurred when Bray owned Packard. Thomas & Betts objected to the substitution. The district court held that Thomas & Betts is liable under the doctrine of successor liability for the damages owed to the plaintiffs from the alleged FLSA violations. Thomas & Betts appealed.

Outcome

On March 26, 2013, the US Court of Appeals for the Seventh Circuit issued an opinion affirming the district court's judgment that:

The Federal common law doctrine of successor liability can apply to FLSA liability.
Thomas & Betts can be liable as a successor in this case.

The court reasoned that:

Imposing successor liability is the default rule in lawsuits to enforce federal labor and employment laws, such as:
- the Labor Management Relations Act (LMRA) (John Wiley & Sons, Inc. v. Livingston);
- the NLRA (Golden State Bottling Co. v. NLRB);
- Title VII (Wheeler v. Snyder Buick, Inc.);
- the Employee Retirement Income Security Act of 1974 (ERISA) (Upholsterers’ Int’l Union Pension Fund v. Artistic Furniture);
- the ADEA (EEOC v. G-K-G, Inc.);
- the FMLA (Sullivan v. Dollar Tree Stores, Inc.); and
- Section 1981 of the Civil Rights Act of 1866 (Section 1981) (Musikiwamba v. Essi, Inc.).
There is no reason to exclude the FLSA from the federal labor and employment laws to which the federal successor liability doctrine and test apply.
In the interest of legal predictability, the successor liability doctrine should be applied to all or none of the federal labor and employment laws. It is preferable to add the FLSA to the laws to which the successor liability doctrine applies given that the doctrine applies already to the other laws.
Imposing successor liability for FLSA violations helps achieve the statutory goals of the FLSA and prevents an employer that violates the FLSA from obtaining a windfall by:
- unjustly enriching itself by flouting the FLSA;
- escaping FLSA liability; and
- retaining the spoils of its violations by selling its assets at a price, assuming the buyer refuses to or is not required to assume the employer's liabilities, that is not discounted for the company's existing FLSA liabilities.
Imposing successor liability for FLSA violations may:
- decrease the value of the offers that purchases may make for insolvent companies with FLSA liabilities, but it will not likely stifle those asset purchases; and
- hypothetically encourage some insolvent companies to sell their assets piecemeal, but it is unlikely to make the practice more common because businesses are usually sold at higher prices when sold as going concerns.
It would be a windfall if a purchaser that bought an insolvent company with FLSA liabilities, maintained the same business operations and workforce but did not answer for its predecessor's FLSA liabilities.
Plaintiff employees would not receive a windfall from being able to obtain damages from a successor company after the predecessor became insolvent. The employees are simply enforcing their rights and the purchasers should account for the potential liability to the employees in their bids.
There may be good reasons (not present in this case) for a court not to impose successor liability for FLSA violations, as with other federal labor and employment laws, such as:
- the purchaser had no notice of the potential liability; or
- there was no continuity in the business operations and work force of the purchased company, and therefore no true "successor".

Practical Implications

The Seventh Circuit's decision in Brian Teed v. Thomas & Betts Power Solutions highlights the importance of conducting thorough due diligence about targets for acquisitions. In at least the Seventh Circuit, successors that acquire a company with any outstanding federal labor or employment liabilities will be liable for them, regardless of whether the successor company specifically disclaimed liability when it acquired the assets. However, as the court points out, disclaiming liability of a predecessor still may be useful against state law claims.

Where an acquisition target is solvent, the parties may effectively use indemnification agreements to defray any resulting successor liability instead of reducing a purchase price. However, as was true in this case, when the acquisition target is insolvent and has potential liability for FLSA violations, an asset purchaser should more seriously consider adjusting its bid for the acquisition target to account for potential successor liability.

Successor Liability Applies in FLSA Actions, Even if Asset Purchaser Disclaims the Acquired Company's Liabilities: Seventh Circuit | Practical Law