Many buyers in asset sales may assume that if the seller and buyer agree that the buyer does not assume the seller’s liabilities, the buyer would have no liability for employment-related issues pertaining to the seller prior to the sale. A recent Seventh Circuit decision authored by the influential Judge Posner in Teed v. Thomas & Betts Power Solutions, L.L.C. reminds purchasers that their assumption is not necessarily true, as the Seventh Circuit noted that when liability is based upon a violation of a federal labor or employment statute, courts apply a more aggressive standard of successor liability than the typical state-law standard to which courts might otherwise look.
In Teed, the purchaser specifically disclaimed any liability when it bought the assets of the seller for previous wage and hour violations under the Fair Labor Standards Act (“FLSA”). Following the sale, the aggrieved employees substituted the purchaser as the defendant in a lawsuit brought against the seller (presumably because the seller was insolvent). In considering the purchaser’s objection to the substitution on the basis of its disclaiming of liability in the asset purchase agreement, the Seventh Circuit held that “(w)e suggest 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.” Although the Seventh Circuit articulated some potential good reasons for withholding liability, such as the successor lacking notice of potential liability and where workers file a flurry of frivolous lawsuits just before a bankruptcy reorganization in the hopes of substituting a solvent acquirer for their employers as a defendant in such suits, the Seventh Circuit did not find such good reasons to exist in Teed, and therefore held that the purchaser is a valid defendant in this FLSA suit.
We expect that aggrieved employees of a seller will attempt to impose successor liability most commonly when the seller is insolvent. Regardless, the Seventh Circuit’s decision provides critical reminder to purchasers that they need to conduct complete and accurate due diligence on actual and potential labor and employment litigation and risks before purchasing the assets of a seller.