Seventh Circuit Affirms Imposition Of Successor Liability For FLSA Claims

Purchasing company is found to be subject to successor liability for federal employment-related claims, even where it explicitly disclaimed such liability in the transfer of assets.

On March 26, Judge Richard A. Posner of the U.S. Court of Appeals for the Seventh Circuit issued his opinion in Teed v. Thomas & Betts Power Solutions, LLC, holding that the U.S. District Court for the Western District of Wisconsin properly applied the principle of successor liability for claims arising under the Fair Labor Standards Act (FLSA) against a company that purchased another company at an auction.1 This ruling was based upon the predicate finding that a federal common law standard for determining successor liability—and not state law—controlled where the liability was based on a violation of a federal statute relating to labor relations or employment.2 The decision is noteworthy for acquiring companies, as it stands in opposition to many state-law theories of successorship, upon which acquirors typically rely when analyzing the risks and benefits of an asset purchase.

Background

In 2006, all of JT Packard & Associates' (Packard's) stock was acquired by S.R. Bray Corporation (Bray). Packard retained its name and corporate identity and continued operating as a stand-alone subsidiary of Bray. In 2008, Packard's employees filed a lawsuit alleging FLSA violations. Several months later, Bray defaulted on a bank loan that Packard had guaranteed. In repayment of its debt to the bank, Bray assigned its assets, including its stock in Packard, to an affiliate of the bank. The assets were placed in a receivership under Wisconsin law and auctioned off, with the bank receiving the proceeds. Thomas & Betts Power Solutions, the highest bidder at the auction, purchased the Packard business through what appeared to be an asset purchase, rather than a purchase of the Packard stock that was transferred to the bank in the settlement of Bray's debt. Thomas & Betts and the bank specified in the definitive agreement for the transfer of assets that the transfer would be "free and clear of all [l]iabilities" and that Thomas & Betts would not assume any liabilities that Packard might incur in its FLSA litigation. After the transfer, Thomas & Betts continued to operate Packard and offered employment to most of Packard's employees.

Through a substitution of defendants by the district court, Thomas & Betts became the entity against which the plaintiffs in the FLSA litigation sought...