Successor Liability for Employment Claims
In employment law, successor liability addresses the situation where one company violates Title VII of the Civil Rights Act (or other federal employment laws) by subjecting an employee to harassment or discrimination, then that company is sold to a second company before
the harassment or discrimination can be remedied. Under some circumstances, that second company can be held liable for the first company’s violations of Title VII — even though the second company did not itself subject the employee to harassment or discrimination.
Courts have emphasized the importance of successor liability in fulfilling Title VII’s remedial purposes. Successor liability under Title VII is an “equitable doctrine … addressing a particular problem of employment discrimination: ‘Failure to hold a successor employer liable for the discriminatory practices of its predecessor could emasculate the relief provisions of Title VII by leaving the discriminatee without a remedy or with an incomplete remedy.’” EEOC v. Phase 2 Investments Inc., 310 F. Supp. 3d 550, 569 (D. Md. 2018) (quoting EEOC v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086, 1091 (6th Cir. 1974)
Therefore, courts may impose liability on a successor company even though it had little relationship to the first company and purchased the first company’s assets without agreeing to take responsibility for the first company’s liabilities to its employees. “Successor liability is liberally imposed.” Fennell v. TLB Plastics Corp., No. 84 Civ. 8775, 1989 WL 88717, *2 (S.D.N.Y. July 28, 1989) (citing Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27 (1987) (finding successor liability (in the labor law context) where the successor changed marketing and sales, did not assume liabilities or trade name, hired employees through newspaper ads rather than from predecessor’s employment records, and seven months had passed between predecessor’s demise and successor’s start up) (emphasis added).
In determining whether successor liability in the Title VII context is appropriate, courts often look to nine equitable factors set forth in the Sixth Circuit’s decision in MacMillan:
1) whether the successor company had notice of the charge, 2) the ability of the predecessor to provide relief, 3) whether there has been a substantial continuity of business operations, 4) whether the new employer uses the same plant, 5) whether he uses the same or substantially the same work force, 6) whether he uses the same or substantially the same supervisory personnel, 7) whether the same jobs exist under substantially the same working conditions, 8) whether he uses the same machinery, equipment and methods of production and 9) whether he produces the same product.
Phase 2, 310 F. Supp. 3d at 570 (quoting MacMillan, 503 F.2d at 1094).
Factors 4-9 are essentially subsets of the “continuity of business operations” factor. The equitable test, then, “really comes down to three major factors: whether a successor had notice, whether a predecessor had the ability to provide relief, and the continuity of the business[.]” Phase 2, 310 F. Supp. 3d at 570 (internal quotes and citations omitted). Many cases in this area turn on a debate as to the first factor: whether the successor company had notice of an employee’s claims against a predecessor company.
Constructive Notice Through Due Diligence
Importantly, for the purposes of successor liability, “notice” can be constructive notice. “Constructive notice is information or knowledge of a fact imputed by law to a person … because he could have discovered the fact by proper diligence, and his situation was such as to cast upon him the duty of inquiring into it.” EEOC v. 786 South LLC, 693 F.Supp.2d 792, 795 (W.D. Tenn. 2010) (citing Black’s Law Dictionary 1062 (6th ed. 1990)).
This means a successor company might be liable for a predecessor’s Title VII violations, even though the second company did not actually know about the violations before the sale, because the second company could have learned about the violations by exercising a little diligence. For example, in Lyles v. CSRA Inc., No. GJH-18-973, 2018 WL 6423894, *4 n3 (D. Md. Dec. 4, 2018), the court found sufficient notice for successor liability where “the record includes evidence of the lengthy due diligence process, meaning a jury could conclude that [the buyers] had constructive notice of the charges.”) Similarly, in 786 South LLC, 693 F.Supp.2d at 795, the court held a successor liable even though it had no actual notice because “constructive notice may suffice under the successor liability doctrine, at least where the relevant charges have been filed with the EEOC”). Likewise, in Lipscomb v. Techs., Servs., & Info., Inc., No. CIV.A. DKC-09-3344, 2011 WL 691605, *9 (D. Md. Feb. 18, 2011) the court imposed liability on a successor defendant even though it had no actual notice of the Title VII violations, because “Defendant could have acquired notice of the EEOC complaint prior to purchasing the MDEBEP subcontract at APG with some due diligence and inquiry.” (emphasis added).
See also Phase 2, 310 F. Supp. 3d at 570 (“At the very least, Maritime had constructive notice…the lengths to which Mister went to protect itself from liability, such as structuring the sale as an asset purchase, inquiring into Maritime’s liabilities, listing the assumed liabilities in a schedule, and including an indemnification clause, actually demonstrate the fairness of holding Mister liable as a successor.”); NLRB v. South Harlan Coal, Inc., 844 F.2d 380, 385 (6th Cir. 1988) (citing Golden State Bottling Co. v. NLRB, 414 U.S. 168, 172-74 (1973) for the principle that “knowledge of unfair labor practice litigation need not be actual, but may be inferred from the circumstances.”); EEOC v. Vucitech, 842 F.2d 936, 945 (7th Cir. 1988) (holding successor liable because, inter alia, it had at least constructive knowledge of discrimination charges); Scott v. Sopris Imports Ltd., 962 F. Supp. 1356, 1359–60 (D. Colo. 1997) (recognizing constructive notice is sufficient under MacMillan).
Constructive Notice Through Common Managers
Typically, constructive notice exists where a potential Title VII violation has been documented with the first company, meaning that the purchasing company has the ability to learn of the claim through by exercising pre-sale due diligence. Constructive notice, in this context, therefore turns on the purchasing company’s ability to acquire notice of a legal claim through “due diligence.” See, e.g., Lipscomb, 2011 WL 691605 at *8 (“As to the notice issue, lack of timely knowledge of a pending EEOC investigation does not per se bar successor liability… With some due diligence, Defendant would have been able to ascertain that Plaintiff had filed an EEOC charge[.]”)
Alternatively, constructive notice may exist where the predecessor’s high level managers, having personal knowledge of an employee’s discrimination claims, then become managers for the successor. See, e.g., EEOC v. Sage Realty Corp., 507 F. Supp. 599, 612 (S.D.N.Y.), decision supplemented, 521 F. Supp. 263 (S.D.N.Y. 1981) (“Palumbo, who was president of [predecessor] Monahan Cleaners, is now a full-time consultant to [successor] Monahan Building, overseeing the operation of Monahan Building’s business and supervising Monahan Building’s employees. Monahan Building had constructive notice of Hasselman’s charge of sex discrimination through Palumbo.”)
In sum, Title VII successor liability is an important equitable doctrine because it protects employees who have been subjected to unlawful discrimination in the event the guilty employer sells its assets before the employee can obtain relief. Successor employers have the ability to learn about potential employee claims before completing a purchase, and use that information to negotiate a lower purchase price. The end result is to protect the relief provisions of Title VII and the employees they cover.
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