Ouch!: ERISA Successor Liability Despite Contractual Exclusions

Federal courts continue to adopt the use of criteria much more expansive than the traditional common law criteria to determine if a purchaser of assets is responsible for the seller’s ERISA liabilities’ despite language in the Asset Purchase Agreement (“APA”) excluding the liability. The courts are saying that there are certain types of ERISA liabilities which will follow the assets no matter what the parties may say contractually to exclude or limit the seller succeeding to the ERISA liability.

The criteria used by the federal courts which have adopted this expanded view of when an obligation of the seller becomes the obligation of the buyer despite provisions in the APA to the contrary has but two elements: (1) notice of the liability (actual or constructive) and (2) continuity of the operations (how closely are the assets purchased used by the buyer in the same way they were used by the seller). Common ownership is not part of the criteria.

Under this expanded definition of when successor liability attaches, the buyer cannot escape the liability by disclaimers or exclusionary provisions in the APA. The courts say that once the buyer is on notice of the liability, the most the buyer can do is negotiate a lower purchase price and/or require the seller to provide an indemnity. Needless to say, neither of these options to mitigate or offset the ERISA liability are necessarily available or practical in a given transaction. Courts generally refuse to enforce contractual indemnity provisions for violations of employment protective statutes, such as Title VII and the FLSA, on public policy grounds. Equal Rights Center v. Arch Stone, Smith Trust v. Niles Bolten Associates, Inc., 602 F.3d 597 (4th Cir. 2010); Gibbs-Alfano v. Burton, 281 F.3d 12, 21-23 (2nd Cir. 2002). The Third and Sixth Circuits have enforced ERISA withdrawal liability indemnification contractual provisions. See, Pittsburgh Mack Sales & Services v. Int’l. Union of Operating Engineers Local Union No. 66, 580 F.3d 185 (3rd Cir. 2009); Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, 2012 WL 880601 (6th Cir., March 16, 2012).

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