In a noteworthy opinion, the Seventh Circuit Court of Appeals has held that an asset purchaser can be responsible for the employment-related liabilities of a company whose assets it has purchased, even if it did not purchase the stock of that company and even if it expressly disclaimed the assumption of those liabilities. The decision is another reminder of the importance of employment diligence and indemnity clauses in asset transactions.
In the case of Teed v. Thomas & Betts Power Solutions, L.L.C., Thomas & Betts purchased the assets of JT Packard & Associates out of receivership. The purchase agreement provided that Thomas & Betts would not be responsible for any liability arising out of already-pending Fair Labor Standards Act (FLSA) litigation against JT Packard arising out of its pre-sale practices. Further, the state court approved the sale from receivership "free and clear of all liens, claims, encumbrances, and other interests of any kind."
After Thomas & Betts placed its acquired assets in a wholly-owned subsidiary and made offers of employment to most of JT Packard's employees, Thomas & Betts continued operating the business in much the same way that it had operated before the purchase. The FLSA plaintiffs then moved to substitute Thomas & Betts for JT Packard as the defendant in the pre-sale litigation that they had brought.
Although the Seventh Circuit agreed that most states limit the circumstances under which an asset purchaser could be liable for the target company's liabilities, it held that the more plaintiff-friendly federal common law standard of successor liability is applicable to FLSA claims. Analyzing the case under this federal standard, the court noted that it cut in favor of successor liability that, among other things: Thomas & Betts had notice of the litigation before the sale; the predecessor could not have provided relief after the sale; Thomas & Betts was capable of providing relief; and there was continuity of the operations and workforce.
Notably, the court went beyond this usual analysis and suggested that "successor liability is appropriate in suits to enforce federal labor or employment laws — even when the successor disclaimed liability when it acquired the assets in question — unless there are good reasons to withhold such liability." Noting that "a disclaimer of successor liability is not a defense," the court ultimately held that no good reason to reject successor liability was presented and that Thomas & Betts could therefore be held to account for the pre-sale pay practices of JT Packard.
The case emphasizes the importance of pre-sale employment diligence, even for an asset sale. It also highlights the value of indemnification rights in a purchase agreement, as it remains possible that purchasers can inherit pre-sale liabilities along with their new assets.
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