Successor liability issues in labor and employment cases.

AuthorHollifield, Travis R.

As the 21st century roars ahead, there has been no slowing of business mergers, buyouts, other consolidations and sales, and bankruptcies. Of course, these corporate "shuffles" almost always impact the employment relationship in some fashion. As such, employment law practitioners will likely be faced with claims that will require careful analysis of federal common law successor liability theory, which differs significantly from state successor liability "alter ego" or "de facto merger" rules applicable to general business debts and other liabilities. This article identifies the primary cases that discuss when and under what circumstances a successor business entity may become or remain liable to a former or current employee for legal protections provided by the principal labor and employment law statutes, with a particular focus on a current federal circuit split regarding this issue.

As a preliminary thought, it is wise to consider the following words from the Seventh Circuit Court of Appeals: "[T]he issue of successor liability is 'dreadfully tangled, reflecting the difficulty of striking the right balance between the competing interests at stake.'" (1)

Golden State and the Supreme Court's Successor Liability Doctrine

The development of successor liability theory in employment law began with a series of U.S. Supreme Court cases discussing successor liability in the context of labor disputes. (2)

Perhaps the most influential case involving this issue is Golden State Bottling Company, Inc. v. National Labor Relations Board, 414 U.S. 168 (1973). This case involved a labor dispute where a driver/sales employee was discharged by Golden State Bottling Co., Inc. (predecessor) for allegedly engaging in protected union activities in violation of provisions of the National Labor Relations Act (NLRA). The National Labor Relations Board (NLRB) found in favor of the employee and ordered Golden State and its "successors and assigns" to reinstate the employee with backpay. After the litigation concluded, Golden State sold its entire bottling business to a company named All American Beverages, Inc. (successor). Subsequent to both the finding of liability and the sale of the business, the employee initiated a backpay liquidation proceeding before the NLRB against both Golden State and All American. The NLRB decided that All American was a successor in interest and that it was required to reinstate, or maintain reinstatement of, the employee absent a justifiable reason for termination and be jointly and severally liable with the predecessor Golden State for payment of the backpay award. The Ninth Circuit upheld the NLRB's finding which was affirmed by the U.S. Supreme Court. (3)

The Supreme Court addressed All American's argument that Fed. R. Civ. P. 65(d) barred enforcement of the NLRB's order of reinstatement as to a successor such as itself. The court rejected the argument and held that "a bona fide purchaser, acquiring, with knowledge that the wrong remains unremedied, the employing enterprise which was the locus of the unfair labor practice, may be considered in privity with its predecessor for purposes of Rule 65(d)." (4) Moreover, the court determined that an NLRB finding of a "continuing business enterprise" is necessary to establish privity between a predecessor and successor for purposes of Rule 65 and the imposition of injunctive remedies against an "innocent" successor such as All American. The court also imposed certain due process conditions precedent to an NLRB finding of successor liability, including the requirement of an evidentiary hearing, after adequate notice, on the issue of successorship and/or on the enforcement of any order issued against a purported successor. (5)

After a review of previous successor cases in the context of labor relations along with public policy justifications for imposing liability on successors, the Supreme Court reiterated the importance of advance notice to the successor of the potential liability so that the successor may negotiate with the predecessor concerning the sales price of the business, or determine whether an indemnity clause is appropriate. (6)

Golden State Analysis Extended to Employment Cases

The year after Golden State was decided, the Sixth Circuit was the first to extend successor liability theory to a Title VII case in EEOC v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086 (6th Cir. 1974).

In MacMillan, an employee filed charges of race and sex discrimination under Title VII with the EEOC against her employer Flintkote Company (predecessor). During the EEOC investigation and conciliation process, MacMillan Bloedel Containers (successor) took over operation of the predecessor's office where the employee was working. After the conciliation process failed, the EEOC initiated litigation against the successor MacMillan. (7)

MacMillan filed a series of dispositive motions, the thrust of which was that the employee never named it as the successor in the EEOC administrative charge and, therefore, the trial court lacked subject matter jurisdiction over the claim. The trial court agreed and granted summary judgment in favor of MacMillan. (8)

On appeal, the EEOC argued that MacMillan was a successor to Flintkote. The Sixth Circuit framed the question in two parts: 1) Can a...

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