November 1, 2021
Successor Liability: Federal Common Law
An asset buyer won’t be responsible for any liabilities that it didn’t explicitly or implicitly assume, but there are a handful of situations where a buyer may face successor liability under state law. These traditional theories of successor liability generally come into play when the business or the ownership of the predecessor has been continued in its entirety. But this Dechert memo addressing recent federal court decisions provides a reminder that when it comes to federal common law, successor liability doctrines cast a wider net. This excerpt summarizes the federal approach to successor liability:
Federal appellate courts, including the Third, Sixth, Seventh, and Ninth Circuits, have carved out an exception to this general rule and recognized that “when liability is based on a violation of a federal statute relating to labor relations or employment, a federal common law standard of successor liability is applied that is more favorable to plaintiffs than most state-law standards to which the court might otherwise look.”
Under this approach, successor liability may be found even in the context of a true asset sale if (1) the successor had notice of the claim, (2) there is “substantial continuity in the operation of the business before and after the sale,” and (3) the predecessor cannot provide the relief sought.
The memo says that federal appellate courts have applied this framework to federal labor & employment claims arising under the Fair Labor Standards Act (FLSA), Title VII, the Family and Medical Leave Act (FLMA), and the Employee Retirement Income Security Act (ERISA), among others.
– John Jenkins